By Our Reporters
Life for many Ugandans in Kampala and other towns is already difficult because of many factors including rent being very high. Rent is high partly because the land lords and house owners are busy servicing bank loans with which the premises were put up in the first place. Problem is real estate is long term investment yet these days tycoons build using commercial loans with short repayment period (5 years) and high interest rate averaging at 20%. The other reason, many landlords say, is because of the enormous taxes they are required to pay and utility bills being high. According to KACITA, many traders have collapsed and quit business to return to the village because of high rent. They accuse the landlords of being greedy and insensitive to the plight of the poor.
NEW M7 DIRECTIVES;
The truth is because of the many demands facing them, land lords collect the money from tenants but omit to pay the 20% rental tax to URA and it’s this ineptness President Museveni complains about in his latest letter to Finance Minister Matia Kasaija. Dated 25th November 2018, the two page letter has Museveni quarreling to Kasaija accusing him of not doing enough to ensure URA (which he supervises) exceeds the mere Shs72n they currently collect annually as rental tax. Museveni, who falls short of announcing Kasaijja’s knifing from cabinet, says he has been receiving intelligence information (subsequently collaborated by an American group) showing there is plenty of laxity in the rental tax collection. Remarkably he doesn’t accuse of URA of collecting and misappropriating the money or even conniving. His case is the URA laxity is what land lords continue to exploit not to 100% remit rental tax which he says is one area with a lot of potential to grow Uganda’s tax to GDP ratio to way beyond 30% which he badly desires to see. Tax to GDP ratio simply means the fraction of the GDP (whole economy) that is contributed by taxes. In simple terms, Museveni (who says Uganda’s economy would be way above Shs110trn if it were not for URA’s ineptness) wants the land lords squeezed more by the tax man than is currently happening. This will simply translate into tenants being charged much more in monthly rent, though economic pundit Ramadhan Goobi doesn’t think so. We shall return to his views later but for now, let’s explain how the rental tax operates and is arrived at by URA.
WHAT’S RENTAL TAX?
It’s a form of income tax and is payable off income made off land or even houses. These could be business or even residential premises provided the occupant pays owner something at the end of the month. URA Chief Publicist Ian Rumanyika explains that whoever earns such income is eligible to paying 20% in rental tax. It’s applicable to any rental income exceeding Shs1.2m annually. Owners of washing bays pay it as well as arcade, hostel or even Apartments owners. It’s provided for under the Income Tax Act and excludes houses which are untaxable because they are too small and fetch negligible rental income for the owners. There is allowable deduction of Shs1.2m off whatever the total sum is. For instance if your rental income per year was Shs10m, Shs1.2m will be deducted before the 20% is calculated. This is meant to cater for the unforeseen expenses like paintings and repairs the owner is presumed to have carried out in that period. The cash or total that remains is what is subjected to 20% tax which URA takes. Museveni says he has information this must exceed Shs72bn URA annually collects and threatens to politically reprimand Kasaijja if URA doesn’t immediately style up. The rental tax is applicable to all manner of rentable properties including warehouses, hostels etc. Museveni, who brags on how OTT and mobile money tax has brought him billions already, wants URA to collect much more implying the pragmatic land lords are going to become more exploitative to their tenants as they prepare to begin complying.
PUNDIT GOOBI DEFENDS M7;
In an interview with this news website, Mubs economics Professor Ramadhan Goobi says for once he agrees with Museveni 100%. He says gratefully enforcement of rental tax can’t result into higher rental charges because land lords are already struggling with vacant arcades and hostels because tenants have already fled because rent is way too high. He says this high rent isn’t because of taxation but it’s because of the high interest rates at which arcade or hostel owners borrow from commercial banks. He faults such tycoons for digging their own grave by using commercial loans to finance real estate construction yet it requires long term financing-and not the 5 year repayment period or even the 20% interest at which commercial banks lend. Goobi predicts this is already leading to a mortgage crisis similar to what Europe faced in the late 2000s. Why? The tycoons can’t service the loans in 5 years and yet banks will confiscate the properties but fail to get buyers for them. He says this partly took down Crane Bank. He says rental is an inelastic tax whose strict enforcement can’t impact on rent charge “because the moment you increase people run away.” He says Museveni is right because real estate has been the fastest growing sector without paying adequate taxes. He says the URA laxity in taxing that area is the reason many rich people have speculatively been investing in real estate rather than industry.
“Real estate isn’t a tradable sector because you can’t export an apartment to bring a dollar yet they import materials to construct using dollars which isn’t good,” Goobi says. He says real estate investors depreciate the shilling while strengthening the dollar because they import construction materials without exporting anything to bring in the dollar. He says strict enforcement of rental tax by URA will force such tycoons to invest in more productive and alternative sectors like industry. He says we need more industries and less bungalows. That a hostile taxation regime will cause investors to shun real estate in favor of more productive sectors to increase forex receipts. He says it’s imprudent for people to speculatively build houses without anybody occupying or buying them. He says in fact vacant land should be taxed even more so that owners and absentee land lords are compelled to sell. “I know the president might be pushing hard because he needs money for his politics and fiscal indiscipline but his directive is inadvertently going to help the economy. Ugandans are over investing in land and this is lazy economics and those are dead investments.” Goobi controversially wonders why modestly rich Ugandans (earning as little as Shs1.5m monthly) should be staying in bungalows “with large compounds and wasting space for things like toilets.” He says the best way is for everybody to live in Apartments where people buy and own condominium titles. He says this is fashionable in wealthier western societies and it diminishes government expenditure on infrastructure provision. “When people live in common places like the Bugoloobi flats and other apartments, it’s easier for government to provide them with common infrastructure like water, power and that’s the direction the strict enforcement of rental tax provisions should lead us in,” Goobi says. He commends Museveni for using tough language in his latest letter because that’s what can break strong-willed bureaucrats at Finance and URA to urgently act as directed. For comments, call, text or whatsapp us on 0703164755.
